The ‘Trojan Horse’ - The (new) implied term of mutual trust and confidence in Australian contracts of employment

The employment relationship is characterised by a degree of trust and confidence. In a decision delivered on 6 August 2013, a majority of the Full Court of the Federal Court of Australia in Commonwealth Bank of Australia v Barker [2013] FCAFC 83 (Jacobson and Lander JJ, Jessup J dissenting)) elevated this feature to a new level.

The majority held that, in the absence of express terms to the contrary, there is an implied term of mutual trust and confidence in every Australian employment contract.

The implications of this for employers could be profound. The implied term was described by Jessup J in his dissent as a ‘Trojan horse’.[1] This seems apt, given the very high level at which the implied term is expressed and its open-ended nature: in fact, the apparent ‘wholesomeness’ of the implied term may conceal a variety of unforeseen obligations.

WHAT IS THE IMPLIED TERM OF MUTUAL TRUST AND CONFIDENCE?

Over the last 15 years or so, the existence of the implied term of mutual trust and confidence in Australian law has been vigorously debated. Its formulation, content and consequences for employers have been explored in a number of cases at various levels of the court hierarchy.

As now expressed by the majority in Barker, the implied term of mutual trust and confidence requires that an employer will not, without reasonable and proper cause, conduct itself in a manner calculated and likely to destroy or seriously damage the relationship of confidence and trust between the parties.[2]

WHAT HAPPENED IN BARKER?

In 2009, the Commonwealth Bank of Australia undertook a nationwide restructure of its Corporate and Financial Services business unit, resulting in Mr Barker’s position being made redundant. Its Redeployment Policy was to redeploy employees to a suitable position where possible. The Bank’s HR Reference Manual provided that the Policy did not ‘... form any part of an employee’s contract of employment’.

Mr Barker was informed by a letter dated 2 March 2009 that although his position had been made redundant, the Bank’s preference was to redeploy him. Mr Barker was told at the meeting that he should clear out his desk, hand in his keys and mobile phone and not return to work. His email facilities and access to the Bank’s intranet were terminated immediately. However, on 9 April 2009, Mr Barker was advised in writing that his employment was terminated by reason of redundancy. In effect, no real steps to redeploy Mr Barker had been taken prior to his employment being terminated.

By that time, Mr Barker had been employed by the Bank for 23 years. His contract of employment (clause 8) contemplated that his employment may be terminated if the Bank were unable to place him in an alternative position. There was no express term in the contract excluding the potential operation of an implied term of mutual trust and confidence.

THE DECISION OF THE TRIAL JUDGE

At trial before a single judge of the Federal Court of Australia, Mr Barker’s contentions included that the Bank had breached the implied term by not acting in accordance with the Redeployment Policy. Besanko J decided in favour of Mr Barker, finding that:[3]

the Policy was not a term of the contract of employment;

nevertheless, the contract included the implied term of trust and confidence, which was implied as a matter of law arising out of the relationship between an employer and an employee;

the Bank’s failure to take timely and meaningful steps to redeploy Mr Barker in accordance with the Redeployment Policy, before his employment was terminated, was a serious breach of the Policy amounting to a breach of the implied term;

Mr Barker was entitled to damages in excess of $300,000 for the loss of the opportunity of the Bank complying with its Policy.

APPEAL - MAJORITY’S REASONS FOR AFFIRMING THE EXISTENCE OF THE IMPLIED TERM

In its appeal to the Full Federal Court, the Bank contended that the trial judge had erred in finding the existence of the implied term. In rejecting the appeal, Jacobson and Lander JJ were persuaded that the weight of authority points in favour of the acceptance of the implied term under Australian law.[4] They reached this conclusion on the following grounds:

policy considerations, accepted by the courts in England, support the development of the implied term in a manner consistent with the contemporary employment relationship;[5]

on this view, the employment relationship involves elements of common interest and partnership, rather than the characteristics of conflict and subordination associated with the old master/servant paradigm;[6]

these elements called for the implication by law of an obligation on the employer (the implied term), the purpose of which is the preservation of the employment relationship.[7]

Further, according to the majority, the implied term only operates in respect of conduct prior to and separate from the manner of termination of the contract of employment – that is, it does not apply at the point of dismissal of an employee or to steps inextricably linked with dismissal.[8]

THE TEST OF ‘NECESSITY’ FOR IMPLICATION BY LAW

It is apparent from their reasons for decision that Jacobson and Lander JJ held that the implication of the implied term by law was ‘necessary’.[9]

The test for the implication of a term by law is that of ‘necessity’, the rationale being that it is necessary to prevent the enjoyment of contractual rights otherwise being rendered nugatory, worthless, or seriously undermined. However, it is not clear precisely what were the contractual rights that Jacobson and Lander JJ considered met this characterisation.

BREACH OF THE IMPLIED TERM

For Jacobson and Lander JJ (contrary to the view of Besanko J at first instance), the Bank’s failure to comply with the Redeployment Policy was not the important factor. Instead, they found that the operation of the implied term was triggered by the circumstances that:

Mr Barker was a senior employee of nearly 23 years standing;

the employer was a large corporate organisation; and

the contract (clause 8) contemplated that the employment may be terminated if the Bank were unable to place the employee in an alternative position.[10]

In these circumstances, Jacobson and Lander JJ held that the implied term required the Bank to take positive steps from 2 March 2009 to consult with Mr Barker about the possibility of redeployment and to provide him with the opportunity to apply for alternative positions within the Bank.[11]

It was held that damages were recoverable for the Bank’s breach of the implied term,[12] with a slight variation to the quantum of damages for economic loss as assessed by the trial judge.[13] Jacobson and Lander JJ confirmed that damages for hurt and distress, or loss of reputation arising from the dismissal, are not recoverable when arising from a breach of the implied term.[14]

BREACH OF THE IMPLIED DUTY OF CO-OPERATION

As an alternative basis for holding the Bank liable, Jacobson and Lander JJ found that the same circumstances triggered the operation of the implied duty of co-operation in the contract of employment.[15]

This implied obligation is anchored upon the need for one party to take positive steps without which the other party is unable to enjoy a right or benefit conferred upon it under the contract.[16]

By analogy to the case where an employee could not be expected to be aware of a benefit unless it is brought to his attention by the employer,[17] Jacobson and Lander JJ held that the circumstances in question also triggered the implied duty of co-operation so that the Bank was obliged to consult with the employee and inform him of suitable employment options.

THE DISSENT

In a detailed dissenting judgment in which he thoroughly examined the evolution of English and Australian case law dealing with the implied term of mutual trust and confidence, Jessup J concluded that: ‘… the question whether the implied term is part of the law of contracts of employment in Australia has never been answered in the affirmative by an Australian appellate court in the sense of being part of the ratio decidendi’.[18]

His Honour went onto hold that the implied term of mutual trust and confidence was not necessary for the enjoyment of the rights conferred by a contract of employment (for example, it was not necessary in order to give an employment contract commercial and industrial validity). Therefore, the term could not be implied by law.[19]

Jessup J described the implied term as having ‘the potential to act as a Trojan horse in the sense of revealing only after the event the specific prohibitions which it imports into the contract.’[20] His Honour considered that the implied term, if accepted, ‘would enable defined limits in the existing fabric of common law and equitable remedies to be side-stepped’; and that the implied term would ‘overlap a number of legislated prohibitions and requirements …, thus tending to compromise the democratically-drawn architecture’ of relevant employment obligations (such as statutory unfair dismissal and discrimination protections).[21]

Jessup J further held (contrary to the opinion of the trial judge) that the presence of the express reservation in the Bank’s Redeployment Policy ‘did not … leave any scope for the conclusion that by merely failing to comply with the policy, the [Bank] breached the implied term.’[22]

LESSONS FOR EMPLOYERS

The majority decision in Barker has confirmed, at least for now, that in the absence of express terms to the contrary, there is an implied term of mutual trust and confidence in every Australian employment contract.

The decision raises for consideration whether employers should expressly exclude the implied term from employment contracts. However, doing so may not be straightforward given:

the wide formulation of the implied term; and

the approach taken by the majority judges, that particular circumstances triggered the operation of the implied term.

From a practical perspective, another important issue for employers to consider is whether seeking to exclude the operation of the implied term of trust and confidence is a ‘good look’ in their interactions with employees. Including an express term in a written contract which excludes the implied term of mutual trust and confidence might not be the best basis for the development of positive employment relationships.

Unless the majority decision in Barker is overturned by the High Court of Australia on appeal, employers now need to add the implied term of mutual trust and confidence and the implied duty of co-operation to their checklist of issues to be mindful of – in addition to matters such as the increasing focus on adverse action claims – in dealings with their employees.

[1][2013] FCAFC 83 at paras [308], [340].

[2][2013] FCAFC 83 at para [98], following the original formulation of the implied term in Malik v Bank of Credit and Commerce International SA (in liq) [1998] AC 20.

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